The effect of digital money on balance-sheet capacity — a practitioner's perspective. "Money is becoming software. The deposit franchise must not become an afterthought."
By Sridhar Aiyangar, Founder & Managing Director · October 2026
For generations, customer deposits have been the foundation of banking. More than a source of funding, they support lending, payments activity, maturity transformation and the economics of the banking franchise. That foundation now faces a new competitive challenge from stablecoins and central bank digital currencies.
Banks have encountered aspects of this challenge before — the growth of mutual funds and money market funds, and, in markets such as India, SIP‑driven mutual fund flows, redirected household savings away from traditional deposits into pooled investment vehicles. The significance was not simply the migration of funds but the change in funding structures: retail balances historically held by millions of depositors increasingly became concentrated within institutional intermediaries. The consequence was not simply a change in ownership, but a change in funding quality. Not all liabilities carry the same regulatory value or support the same level of balance‑sheet capacity. Stablecoins may represent the next stage of that evolution, distinguished by greater portability, programmability and transaction utility.
The debate is often framed as a technological one. The more important question is economic. While these forms of digital money may appear similar to users, they have fundamentally different consequences for bank balance sheets. There are three competing forms:
These distinctions matter because banks derive value not simply from the volume of deposits, but from the balance‑sheet capacity those deposits support, which depends on the characteristics of those liabilities. The form that digital money ultimately takes will therefore influence not only payments and settlement, but also lending capacity, earnings generation and franchise value.
This issue is no longer theoretical. According to Citi's Stablecoins 2030 (September 2025 update), stablecoin issuance could reach approximately US$1.9 trillion by 2030 in a base case and as much as US$4.0 trillion in a bullish scenario. At those levels, digital money becomes a material balance‑sheet issue rather than a niche payments innovation. This helps explain why banks such as JPMorgan are investing heavily in tokenised deposits, consortium‑led settlement networks and new digital infrastructure. The objective is not merely digitisation — it is the preservation of the balance‑sheet economics embedded within the traditional deposit franchise.
The policy and commercial landscape have changed quickly. The US GENIUS Act, enacted in July 2025, established a federal framework for payment stablecoins — including reserve, redemption and yield‑related requirements — with implementation developing through subsequent rulemaking. The market for dollar‑denominated stablecoins has reached approximately US$300–320 billion according to 2026 market trackers, although market value and actual use in commerce should not be conflated. Meanwhile, JPMorgan has developed a tokenised deposit offering for institutional activity, and industry initiatives — including The Clearing House's On‑Chain Money Initiative — point towards shared infrastructure rather than isolated bank tokens.
The Bank of England's June 2026 policy statement and draft rules for systemic sterling stablecoins envisage backing of up to 70% in short‑term UK government debt and the remainder in central‑bank deposits, alongside an initial temporary issuance guardrail of £40 billion per systemic coin. In the Gulf, the UAE has established a payment‑token regime and developed the Digital Dirham, while Bahrain has created a dedicated stablecoin module, including tightly conditioned treatment of reserve‑derived returns. The detail matters: some regulators primarily constrain yield and access; others focus on the reserve model and monetary sovereignty.
Each initiative answers a different question. But all three rest on the same assumption: that money will move on programmable rails, around the clock, with finality in seconds. The bank funding model was designed around behavioural stability; it must now confront technology that reduces some of the frictions on which that stability depended.
A deposit is both a financial liability and a source of balance‑sheet capacity that drives franchise value. Its value extends beyond its nominal amount or contractual maturity. Stable customer deposits provide liquidity value, stable‑funding value and the ability to support productive assets. Through this capacity, deposits underpin lending, payments activity, maturity transformation and earnings generation. The true economic value of a deposit franchise therefore lies not simply in the funding it provides, but in the balance‑sheet capacity it supports.
This distinction is often overlooked. Two liability structures with identical nominal balances may support very different levels of asset creation. A diversified insured retail deposit base composed of millions of customers is economically different from a concentrated institutional funding base, even where the aggregate liability amount is identical. The composition of funding matters as much as its quantity.
Deposit beta, funds transfer pricing and prudential liquidity metrics are ultimately attempts to measure aspects of this economic value. The critical question for Balance Sheet Management is not simply how much funding a bank possesses, but how much balance‑sheet capacity that funding supports. As liability structures evolve, so too does the capacity for lending, earnings generation and franchise creation.
The debate over digital money is often framed as a technological contest. In practice, the more important distinction lies in the balance sheet that stands behind each instrument, and the resulting implications for funding, liquidity and asset creation. While the three principal forms — payment stablecoins, tokenised deposits and CBDCs — may appear functionally similar to users, their implications for the banking system are materially different.
Payment stablecoins are issuer liabilities designed to maintain a reference value, commonly backed by cash, commercial‑bank deposits and short‑dated sovereign securities. Under frameworks such as the GENIUS Act and MiCAR, issuers are generally restricted in their ability to pay interest directly to holders, placing greater emphasis on transaction utility, programmability and settlement efficiency than on yield.
From a balance‑sheet perspective, the impact is significant because it can transform the composition of bank liabilities. When customers convert deposits into stablecoins, those funds frequently reappear within the banking system as reserve accounts maintained by the issuer. How much remains — and where — is bounded by reserve composition and by where the chain of payments ends: reserves held as bank deposits transform the liability; reserves invested in bills or repo recycle deposits to whoever sold the assets, preserving system totals at first approximation while still stripping the originating bank of its funding; and reserves lodged at the central bank, as the Bank of England model requires, leave commercial banking altogether. Transformation, redistribution, disintermediation — the reserve mix decides the blend. What was previously a diversified retail funding base becomes concentrated institutional funding, carrying lower regulatory value and lower balance‑sheet capacity than the deposits it replaces.
Tokenised deposits are commercial‑bank deposit liabilities recorded or transferred using token‑based infrastructure. Where they satisfy the statutory definition of deposits, they remain fully within the banking perimeter. Eligibility for deposit protection, prudential treatment and regulatory oversight depends on the underlying legal structure, not the technology used to represent the claim.
From a Balance Sheet Management perspective, tokenised deposits address a problem that stablecoins or CBDC do not: they seek to preserve the legal, regulatory and economic characteristics of traditional deposits while delivering many of the operational advantages of tokenisation. This helps explain why many banks are investing aggressively in them — they offer a path to modernise payment rails without sacrificing the liquidity value, stable‑funding value and balance‑sheet capacity embedded in the traditional deposit franchise.
CBDCs represent a fundamentally different form of money because they are generally a direct claim on the central bank. Unlike stablecoins, which transform liabilities within the banking system, retail CBDCs can displace commercial‑bank deposits altogether. While central‑bank liquidity can be recycled through the financial system, it does not automatically recreate the deposit funding and balance‑sheet capacity that have been removed. This explains why many CBDC proposals include holding limits, remuneration constraints or other safeguards intended to mitigate large‑scale migration from bank deposits.
| Metric | Tokenised deposits | Payment stablecoins | Standard stablecoins / crypto assets |
|---|---|---|---|
| Legal / regulatory framework | Banking Law / CRR3 | MiCAR EMT / PRA payment rules | MiCAR ART / Basel Group 2 |
| Typical LCR outflow assumption | 5%–10% (retail); 25%–40% (wholesale) | 25%–100% (classification‑dependent) | 100% |
| Typical NSFR ASF recognition | 90%–95% (retail); 50% (wholesale) | 0% (under 6 months; term‑dependent) | 0% |
| Asset‑side backing | Traditional banking model | 1:1 segregated reserves | 1:1 segregated reserves |
| Regulatory funding value | High | Low | Minimal |
| Balance‑sheet capacity supported | High | Reduced | Limited |
The table highlights an important point. Digital money is often discussed as though all digital liabilities are economically equivalent. They are not — two instruments may operate on similar technology while producing materially different balance‑sheet outcomes.
Large forecasts should be interpreted with discipline. An April 2025 Treasury Borrowing Advisory Committee presentation identified a sizeable US deposit base theoretically exposed to substitution; that is an exposure map, not a forecast of withdrawals. According to Citi's Stablecoins 2030, issuance could reach ~US$1.9 trillion by 2030 (base case) and as much as US$4.0 trillion (bullish). At those levels, digital money ceases to be a payments innovation and becomes a balance‑sheet issue. The balance‑sheet consequences depend entirely on the form of adoption:
At Citi's projected scale, this distinction becomes economically significant. Trillions of dollars of retail deposits could potentially be replaced by a much smaller number of concentrated institutional reserve balances. The result is a decline in the regulatory and economic value of funding, reduced balance‑sheet capacity, lower lending capacity and, ultimately, a structural erosion in franchise value. Banks are not investing heavily in tokenised deposits merely because they wish to participate in digital money — they are doing so because tokenised deposits preserve the regulatory, economic and balance‑sheet characteristics of traditional deposits, though some fee income is sacrificed. The more relevant question is no longer whether stablecoins matter, but whether adoption occurs through stablecoins, tokenised deposits or CBDCs.
The distinction between retail deposits and stablecoin reserve deposits is not merely legal or operational. It is regulatory and economic. Under prudential frameworks, funding sources receive different treatment because they exhibit different behavioural characteristics under stress. Stable retail deposits benefit from favourable recognition under both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Concentrated institutional balances receive less favourable treatment because they are potentially more mobile, more correlated and more susceptible to withdrawal under stress.
This distinction has direct balance‑sheet consequences. A liability with lower LCR and NSFR value supports less balance‑sheet capacity than a liability of identical nominal size with more favourable prudential treatment. Stablecoins therefore matter not simply because they may alter the quantity of deposits, but because they can alter the quality of deposits.
Silicon Valley Bank experienced deposit outflows of US$42 billion in a single day on 9 March 2023, demonstrating how rapidly existing digital channels can move funds. Tokenisation should not therefore be credited with creating the path to instant deposit flight — mobile apps already provide it. The new structural possibility is the combination of automated sweeps, programmable conditions, wider interoperability and alternative claims on money that do not have to remain on a commercial bank's balance sheet. A deposit that can move at software speed remains valuable funding — until customers gain the means and incentive to exercise that option at scale.
The historical analogy is instructive, provided its limits are recognised. In 2008, the Reserve Primary Fund broke the buck after losses on Lehman Brothers exposure, exposing the fragility of instruments that promise cash‑like redemption while holding market assets. Modern reserve‑backed stablecoins differ materially from prime money‑market funds in their intended asset quality, legal structure and emerging regulatory requirements. Nonetheless, both can experience confidence‑driven redemption pressure. In March 2023, USDC temporarily lost its peg after disclosing that ~US$3.3 billion of reserves were held at Silicon Valley Bank — a modest portion of inaccessible reserves was sufficient to trigger disproportionate concern over convertibility.
| 2008 money market fund experience | 2026 reserve‑backed stablecoin risk |
|---|---|
| Cash‑like value and par expectation | Par redemption expectation subject to legal terms |
| Potential losses or illiquidity in reserve assets | Reserve, custodian, settlement and confidence risks |
| Reserve Primary Fund broke the buck | USDC temporarily de‑pegged in March 2023 |
| Fund redemptions through established dealing cycles | Token transfers can be 24/7; fiat redemptions follow issuer terms |
| Regulatory reforms followed a systemic episode | Dedicated regulatory frameworks being developed before systemic scale |
The encouraging difference from 2008 is that policymakers are establishing dedicated stablecoin requirements before adoption becomes fully systemic. Reserve quality, segregation, redemption rights, custody and operational resilience should reduce some vulnerabilities — they cannot make liquidity or confidence risk disappear. Official‑sector research identifies several possible transmission channels: liquidation or financing of reserve securities, movement of deposits between institutions, concentrated custodian‑bank exposures, and disruption to payment arrangements that rely on tokens. BIS Working Paper No. 1270 provides evidence that stablecoin flows already affect short‑dated US Treasury yields, with stronger effects under market stress and at greater scale.
Three liquidity clocks must be distinguished. On‑chain token transfers may operate continuously. Secondary‑market conversion depends on dealers, exchanges and market liquidity. Primary redemption into fiat depends on the issuer's terms, banking arrangements and access to settlement systems; the FDIC's April 2026 proposed rules generally contemplate redemption within two business days. An overnight de‑peg can therefore emerge before the corresponding movement in bank reserves or deposits. The danger is a mismatch between continuous market pressure and the more constrained operating hours and liquidity arrangements of the assets and institutions underneath it.
For emerging markets and small open economies, dollar stablecoins provide an efficient means of holding and transferring dollar‑linked value. That can improve payment access while also intensifying currency substitution and complicating monetary and capital‑flow policies. The exposure differs between dollar‑pegged economies, in which the token may seem economically familiar, and exchange‑controlled economies, in which acquisition, transfer and conversion remain subject to local law.
In the Gulf, different regulatory designs provide an important experiment. The UAE's payment‑token framework gives special treatment to dirham‑referenced tokens for domestic payment uses and sits alongside development of the Digital Dirham. Bahrain has established an authorisation framework for stablecoin issuers, including constrained circumstances in which reserve‑derived returns may be permitted. For regional banks, competition will be corridor‑specific: the question is which currency, customer base, settlement arrangement and legal protections matter most in each flow.
Exchange controls do not disappear when a payment instruction is written to a blockchain. Rules on authorised dealers, remittances, export proceeds and reporting may still apply; enforcement, however, becomes more complex when transfers occur between self‑hosted wallets and across jurisdictions. Stablecoin adoption statistics should not be treated as evidence that all activity represents illicit capital flight — legitimate remittances, savings demand, speculative activity and evasion of controls may coexist in the same markets. The policy options include prohibiting certain uses, ring‑fencing domestic payments, licensing on‑ and off‑ramps, imposing conversion and reporting obligations, or providing competitive domestic payment alternatives. The balance‑sheet consequence of money that remains offshore is foregone deposit formation, not simply withdrawal of existing balances.
Tokenised value changes the compliance operating model. In conventional banking, customer due diligence occurs at account opening and controls are applied along payment and correspondent‑banking chains. On public ledgers, transfers may occur directly between wallets, while transaction activity can often be observed and analysed both before and after settlement. Banks and issuers therefore need an integrated approach: identity and sanctions controls at entry and exit points, wallet‑risk assessment, blockchain analytics, transaction monitoring and clear procedures for freezes, investigations and escalation.
Centralised issuers may possess powerful capabilities to freeze or blacklist identified tokens, potentially assisting lawful enforcement. Those powers are not universal across token designs and do not remove the challenges of attribution, false positives, sanctions interpretation or cross‑chain movement. For banks, the consequences are practical: monitor exposure to intermediaries and wallet clusters, understand nested relationships through crypto on‑ and off‑ramps, and ensure that 24/7 payment capabilities are matched by suitably resilient screening and response arrangements. Faster settlement compresses the time available for intervention, even where enhanced transparency provides more useful evidence after the event.
Banks have four broad postures: (1) monitor developments; (2) provide custody or reserve banking; (3) partner with issuers or join a consortium; or (4) tokenise their own deposits.
Passive observation without a strategic assessment is increasingly difficult to defend. Reserve custody may bring attractive fee and balance‑sheet opportunities, but concentrated stablecoin‑issuer balances should be evaluated as potentially volatile institutional funding, not treated as automatically equivalent to granular franchise deposits. The custodian‑bank proposition is asymmetric: during a growth phase an issuer may place substantial deposits with its banking partners; during contraction or a confidence shock the same funding may become unusually mobile. Profitability recognised during expansion must therefore be evaluated against liquidity optionality in stress, concentration risk, collateral requirements and the possibility of correlated withdrawals across issuers and platforms. FTP and funding limits should reflect this asymmetry.
A bank‑backed consortium stablecoin can be understood as both defensive and offensive: it seeks to retain a role in payments and customer distribution, even if some balances move outside traditional deposit accounts. Yet bank consortia have historically faced complex governance and interoperability challenges. For many banks, tokenised deposits provide a coherent strategy where the aim is to retain deposit liabilities while meeting customer demand for programmable transfers — their advantage is legal and economic continuity, subject to the product meeting deposit‑law definitions and insurance limits. Their commercial weakness is interoperability: thirty incompatible bank tokens may be less useful than a broadly accepted payment token. Banks should therefore prioritise sound legal design, customer utility, agreed standards and interoperability rather than a technology demonstration.
United States. The GENIUS Act establishes a federal framework for payment stablecoins, including reserve and yield restrictions, but important implementation detail continues through rulemaking. The FDIC's April 2026 proposal reinforces a central theme of this paper: technology does not determine regulatory treatment. A qualifying tokenised deposit remains a deposit; a stablecoin remains an issuer liability. The nature of the claim matters more than the technology used to record it — these should not be collapsed into a claim that all digital money is insured.
United Kingdom. The Bank of England's June 2026 policy statement and draft rules for systemic sterling stablecoins set a proposed architecture involving a maximum 70% allocation to short‑term gilts and the balance in central‑bank deposits, with an initial £40 billion temporary issuance guardrail per systemic stablecoin. The Bank and FCA envisage coordinated oversight for issuers recognised as systemic.
The Gulf. The UAE and Bahrain have adopted different approaches to private payment tokens and domestic monetary arrangements. Bahrain's SIO module addresses yield‑bearing approved stablecoins under conditions of rate reasonableness, annual filings, disclosure, and treatment of yield‑bearing coins as securities; it is not an unrestricted permission to pay deposit‑like returns. Across jurisdictions, the issues that matter to banks are reserve location, redemption terms, interest or reward treatment, central‑bank access, legal finality and the ability to move between tokenised deposits and other forms of money. These variables will shape whether stablecoins principally capture payment flows, deposit balances or both — and where market‑liquidity pressures impact the regulated banking system.
For executive committees, strategy becomes measurement. The relevant management question is the total risk‑adjusted economic contribution of a relationship, not the deposit number in isolation.
Banking has adapted to successive changes in the instruments and networks through which money moves. It can adapt again. But the winners will be institutions that understand tokenisation as a change in customer options, liability behaviour and franchise economics — not simply as an IT modernisation project. Stablecoins may take payments that banks priced complacently. Tokenised deposits and interoperable bank infrastructure may protect some relationships. CBDC may reduce the available pool of funds to the banking system.
The fight for the deposit franchise will not be decided by technologists. It will be decided in management strategy and ALCOs, in rulemakings, and in the repricing of liabilities that have learned to move.
Money is becoming software. The deposit franchise must not become an afterthought.
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Regulatory references are as understood at October 2026 and based on published policy, draft rules and market trackers (including the US GENIUS Act and FDIC proposals, the Bank of England's June 2026 systemic‑stablecoin policy statement, CBUAE and Central Bank of Bahrain frameworks, Citi GPS Stablecoins 2030, and BIS Working Paper No. 1270). Figures are indicative and time‑sensitive. This article expresses the author's views and is not investment, legal or regulatory advice.
Part of The Balance Sheet Doctor — Sterling Consulting's Building Financial Resilience series.
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